Comprehensive analysis of Taxation on Provident Fund (PF) and NPS



Taxation of Employee Provident Fund

Taxation of NPS



 

Taxation of Employee Provident Fund


Until recently, the Provident fund (PF) contributed, and interest thereon was out of tax ambit. However, recent changes to the income tax laws in India have proposed to tax the PF contributions and interest income over certain limits. This blog summarizes the taxation aspects relating to PF, including:


1. Taxation of PF at the time investment by employee and employer.

2. Taxation on interest earned on PF money. On both balances – employee’s and employer’s contribution.

3. Taxation of PF at the time of withdrawal.


Let’s analyze in detail.


Part A: Table 1: Summary of PF taxation:

Particulars of event

Employer’s Contribution

Employee’s Contribution

Contribution to PF

As per Union Budget 2020, employer’s contribution to Provident Fund, National Pension Scheme (NPS) and Superannuation Fund more than Rs.7.5 lakh will be taxable as perquisites in the hands of the employee.

Exepmt

Interest on PF

Refer notes below and Part B for illustration

As per Union Budget 2021, the interest earned on the Employees’ Provident Fund (EPF) account as relatable to contributions more than Rs.2.50 lakh will be taxable. For example if you contributed Rs. 3 lacs to EPF account, interest earned on 50,000 will be taxable.

Withdrawal of PF

(Before 5 years of continuous service)

Employer’s contribution and interest on it is fully taxable. Employer’s contribution is taxed under the head salary in your tax return. Interest is taxed under income from other sources.

When TDS is deducted on it, you are likely to see an entry under salary TDS in your Form 26AS for it.

1. Deduction u/s 80C availed at the time of investment- Taxable as Income from Salary.

If Deduction u/s 80C not availed at the time of investment- Not Taxable

2. The Interest portion will be taxed as income from other sources.

Withdrawal of PF

(After 5 years of continuous service)

Exempt

Exempt

Notes:

  1. Interest taxability shall be applicable only for the contribution made on or after April 1, 2021. If you have accumulated balance before 1st April 2021, interest thereof will not be taxable.

  2. Interest earned by the employee till 31st March 2021 are not taxable.

  3. The newly inserted Rule 9D has specified that separate accounts within the PF Accounts shall be maintained clearing segregating the taxable and non-taxable contributions to PF along with interest thereon.

a. Non-taxable Contribution Account

b. Taxable Contribution Account


Part B: Illustrations:


I. Calculation of taxable portion of Interest on PF – relating to fund contributed by employee:

Month

Monthly Employee Contribution

Balance at the end of each month (Cumulative)

Interest @ 8.5% (illustrative rate)

Non-Taxable

Taxable

April 21

30,000

30,000

213

213

0

May 21

30,000

60,000

425

425

0

June 21

30,000

90,000

638

638

0

July 21

30,000

1,20,000

850

850

0

Aug 21

30,000

1,50,000

1,063

1,063

0

Sep 21

30,000

1,80,000

1,275

1,275

0

Oct 21

30,000

2,10,000

1,488

1,488

0

Nov 21

30,000

2,40,000

1,700

1,700

0

30,000

2,50,000

1,771

1,771

0

Dec -21 (This months contribution is split in two parts)

2,70,000

142

0

142

Jan 22

30,000

3,00,000

2,125

1,771

354

Feb 22

30,000

3,30,000

2,338

1,771

567

Mar 22

30,000

3,60,000

2,550

1,771

779

Total

3,60,000

16,578

14,736

1,842

II. Summary of above:


Sr.No.

Particulars

Total

Non-taxable Account

Taxable Account

1

Opening Balance as of 01 Apr 2021

50,00,000

50,00,000

-

2

Contribution made up to threshold limit / excess of limit in 2021-22

3,60,000

2,50,000

1,10,000

(Exceeding 2.50 lacs is taxable)

3

Interest accrued on the amount within threshold / above threshold limit

16,578

14,736

1,842

Closing Balance as on 31 Mar 2022

-

52,64,736

1,11,842


III. Calculation of taxable portion of Interest on PF – relating to fund contributed by employer:


As the Employer’s contribution above Rs. 7.5 Lakhs will be taxable, the interest on such excess contribution is taxable us 17(2) (viia) as per Rule 3B.


Rule 3B provides the below formula to calculate the taxable perquisite u/s 17(2)(viia):


TP = (PC/2)*R + (PC1+TP1)*R

Where,

TP=Taxable perquisite under u/s 17(2)(viia) of the Act for the current previous year;


TP1=Aggregate of taxable perquisite u/s 17(2)(viia) of the Act for the previous year or years commencing on or after 1st day April, 2020 other than the current previous year


PC=Amount or aggregate of amounts of principal contribution made by the employer in excess of Rs. 7.5 lakh to the specified fund or scheme during the previous year


PC1=Amount or aggregate of amounts of principal contribution made by the employer in excess of Rs. 7.5 lakh to the specified fund or scheme for the previous year or years commencing on or after 1st day April, 2020 other than the current previous year


R=I/Favg


I=Amount or aggregate of amounts of income accrued during the current previous year in the specified fund or scheme account;


Favg=(Amount or aggregate of amounts of balance to the credit of the specified fund or scheme on the first day of the current previous Year + Amount or aggregate of amounts of balance to the credit of the specified fund or scheme on the last day of the current previous year)/2.

Example:

Particulars

Year 1

Year 2

Year 3

Year 4

Year 5